Case Analysis: UOI v. Mohit Mineral Pvt. Ltd.

AIR 2018 SC 5318Citation
Union of India v. Mohit Mineral Pvt. Ltd.Name of the Case
A Bhushan, A SikriBench
Goods and Services Tax (Compensation to States) Act, 2017 (CSA)Act

Introduction

The landmark case of UOI v. Mohit Mineral Pvt. Ltd was the first case which deals with the amendment to the new tax regime of Good and service tax. The constitutional validity of the Goods and Services Tax (Compensation to States Act), 2017 and the Goods and Services Tax Compensation Cess Rules, 2017, came up before consideration before the Hon’ble Supreme Court in this case. As we all know, the Constitution (One Hundred and First Amendment) Act, 2016 (Amendment Act), introduced the Goods and Services Tax (GST) regime in India which came into force from 8th September, 2016 and became effective from 1st July 2017. By the introduction of this GST it paved out and replaced many indirect taxes from the country and due to this act enforcement various states raised concerns over the loss of income as a consequence of introducing the GST regime.

Various laws were also passed subsequently for implementing the GST, which became effective from 1st July, 2017. The amendment act and corresponding legislation empower both Parliament and the States to levy GST on supplies of goods and services. Due to the concern of the loss of revenue by the introduction of GST the other act came into force and whose validity was challenged before the Supreme Court. The Goods and Services Tax (Compensation to States) Act, 2017 (CSA) was enacted in order to compensate the States for this loss of revenue. Section 8 of this act provides for levy of a ‘cess’ on intra-State and inter-State supply of goods or services, or both, as a means of compensation for a period of five years, or for such period prescribed as per the recommendation of the GST Council. This cess collected has to be distributed amongst the States in the manner prescribed under the Act and the corresponding rules framed under it.

Facts of the case

The petitioner Mohit Mineral Pvt. Ltd. is a company which is incorporated under the companies act which is a trader of imported and Indian coal. The petitioner imports coal from Indonesia, south Africa and also purchases coal from Indian mines. The finance act, 2010 levied clean energy which was in the nature of a duty of excise on the production of coal and was being collected at the time of removal of raw coal, raw lignite and raw peat from the mine to the factory, inter alia,   providing   for   subsuming   of various indirect taxes and Central and States surcharges and cesses so far as they relate to supply of goods and services both   on   interstate   and   intrastate.  

The Constitution (101 AOmendment) Act, 2016 was passed to levy goods and service tax. Section 18 of the amendment act enabled the parliament to levy a cess for five years to compensate the state for five year for the loss of the revenue on account of GST. On 12 April 2017 parliament enacted 3 acts namely The Central Goods and Service Tax, The Integrated Good and Service Tax and The Goods and Service (compensation to the states) tax 2017. And the petitioner has already given clean energy cess which has been repealed by the taxation law amendment act. The writ petition submits the representation to set off the clean energy cess with GST compensation cess.

Analysis of case

In this case the constitutional validity of the Goods and Services Tax (Compensation to States) Act, 2017, and the Goods and Services Tax Compensation Cess Rules, 2017, came up before consideration before the court. Among the contentions raised, one was that the act was beyond the legislative competence of the Parliament. The court, however, upheld the legislative competence of Parliament to enact the law, pointing out that Article 270, after the Constitution (One Hundred and First Amendment) Act, 2016, specifically empowers Parliament to levy any cess by law. Although the court also emphasized the fact that Section 18 of the Amendment Act expressly empowers the Parliament to compensate the States for loss of revenue arising on account of implementation of the GST, ‘by law’, this factor did not form the basis of the court’s decision.

According to section 18 of the amendment act it states that Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.

Thus, this clause authorizes the Parliament to frame law for compensating the States on account of loss in the revenue arising due to the implementation of GST. It is pertinent to note that although Section 18 forms a part of the GST amendment act, it has not been reflected in the amended text of the Constitution. First of all Section 18 of the amendment act is not an ordinary piece of legislation and in fact has a constitutional basis  and secondly, although Section 18 does not specifically amend the text of Constitution, it can still be considered as a source of power to frame a law providing for compensation to the States. In addition to this, the possibility of conflict of such a power with the residuary provisions under Schedule VII, and the manner of resolving such a conflict, has also been discussed.

Dispute before the Supreme Court

Firstly the petition was filed before the Delhi High Court challenging the validity of the Compensation Act and the Rules made thereunder. The challenge was in the context of the levy of cess on coal supplied by the petitioner. The High Court passed a decree in favor of the petitioner doubting the legislative capacity of Parliament in enacting the Compensation Act. In parallel to this the appeal was filed by the Government of India before the Supreme Court challenging this order of the High Court. Accepting the request of the GoI, the Supreme Court ordered the transfer and took upon itself the hearing of the petition concerning the challenge to the validity of the Compensation Act.

The petitioner while dealing with the imported coal had already suffered “clean energy cess” levied under the erstwhile indirect tax laws at the time of its import. It was argued before the Supreme Court that in the event the levy of compensation cess is sustained then the credit on account of clean energy cess may be permitted for set-off against the compensation cess obligation. These contentions were resisted by the GoI which took a position that compensation cess is essentially a “special kind of tax” and therefore a special kind of GST. On such premise it was contended by the GoI before the Supreme Court that once Parliament was competent to enact GST, the competence to enact the levy of compensation cess was a logical concomitant. The GoI also pressed upon Article 270 to attribute another legislative enablement for levy of the compensation cess besides placing reliance upon Entry 97 of the List I of the Seventh Schedule of the Constitution to contend that the levy of compensation cess could also be enacted in exercise of its residuary powers.

Taking note of the rival contentions, the Supreme Court framed the following issues for its determination:

(1) Whether the Goods and Services Tax (Compensation to States Act), 2017 is beyond the legislative competence of Parliament?

(2) Whether the Goods and Services Tax (Compensation to States Act), 2017 violates Constitution (One Hundred and First Amendment) Act, 2016 and is against the objective of Constitution (One Hundred and First Amendment) Act, 2016?

(3) Whether the Goods and Services Tax (Compensation to States Act), 2017 is a colorable legislation?

(4) Whether levy of compensation to States’ cess and GST on the same taxing event is permissible in law?

(5) Whether on the basis of clean energy cess paid by the petitioner till 30-6-2017, the petitioner is entitled for set-off in payment of compensation to States’ cess?”

Judgment

The Supreme Court after analyzing the constitutional provisions relating to levy of GST in order to highlight the underlying constitutional and legislative scheme which is significant on various counts. The Supreme Court has declared that cess “means a tax levied for some special purpose, which may be levied as an increment to an existing tax”. Thus the legislature has the power to impose GST which carries the power to impose cess on GST. Also there is nothing in the draft of the Amendment Act “that henceforth no surcharge or cess shall be levied”. The decision specifically highlights that it is already well settled that “two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction are permissible”. Thus insofar as GST and compensation cess operate in their distinct spheres, the validity of both has been sustained.

Conclusion

After analyzing the case of Mohit Mineral and its decision by the Supreme Courtis a timely endorsement of the large-scaled amendments brought about to the Constitution in order to a new era of indirect taxes. After setting aside all challenges and contentions to the levy of GST compensation cess, the Supreme Court has paved the way for its unbridled implementation of GST design as a legislative policy. While the challenge in this case was limited to a finer aspect of this grand design, the decision clearly inhibits the scope for future challenges and therefore sets tone for judicial appreciation of changes effected on account of GST. Hopefully this will only be taken as a measure of confidence by the policymakers to iron out the creases in the GST design and usher the reform in its fullest sense.

The rationale underlying the Compensation Act also posits it as a key variable for embodying the trust between the Union and the States and agreement to implement GST together in a cooperative sense. By upholding the validity of the Compensation Act the Supreme Court has thus also sustained this key pillar for fiscal Centre-State relations and thus furthered the cause of the reform represented by GST.

Questions

  1. What are the legislations which were introduced after the GST regime?
  2. What are the issues which are dealt by the Supreme Court in the UOI v. Mohit Mineral Pvt. Ltd?
  3. Why this compensation act court considered that it is out of competency of the parliament
  4. Whether the Supreme Court judgment was appropriate and given with full justice?

References

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